Shell’s foray into Alaska oil isn’t paying off

Shell started its hunt for oil off the coast of Alaska more than a year ago, but the effort proved disastrous. Shell spent $5 billion, but not a single well was drilled and its rig ran aground. Shell racked up big fines for faulty equipment, pollution and safety violations and sat out the last season. Reporter Elizabeth Arnold looked into the state of Arctic oil exploration in the U.S.

Out the window of a propeller plane, Wainwright appears below through the fog, an Inupiaq Eskimo village of wooden houses perched on a sand spit at the edge of the Arctic Ocean. I’m the only one on this flight, just me, the pilot and a dozen empty seats. We land on a short dirt runway. There’s no one around, so I head to town on foot.

Wainwright is the usual portrait of contrast in the Arctic, a polar bear hide stretched over a satellite dish, slabs of whale meat in the bed of a shiny new pick up. Old ways, and new money.

Wainwright is the closest village to Royal Dutch Shell’s most prized oil leases offshore. It’s where a subsea pipeline would surface to move oil 300 miles across the frozen tundra to Prudhoe Bay. A year ago, this place wasn’t so quiet. Flights were sold out and the man camp was full up. But other than a lone excavator shoring up the eroding beach, there’s no sign of any activity here today.

Inside the tribal office, Ronnie Morales makes coffee and shakes her head over how quickly everything came to a standstill.

“With their ability to just up and go, that just really made it real, you know that really happens,” she says.

Six years ago, at a standing-room-only auction in Anchorage, Shell spent $2 billion on leases in the Arctic, including a record-breaking amount for a single block just miles out from this village. But Shell had problems from the start.

Support vessels were deemed unsafe, a rig dragged anchor on its way north, and last year, when Shell was finally allowed to start limited drilling, an ice flow 30 miles long and 80 feet thick shut down operations after just one day.

The Coast Guard found multiple violations on one rig, and the other snapped its tow lines and ran aground.

A month later, Shell announced it wouldn’t try to drill in 2013. Interior Secretary Sally Jewell says the industry just wasn’t ready.

“Nobody wants to put their company at risk, their reputation at risk, or the environment at risk,” she says. “And I think that that’s what we saw in the lessons learned over the course of the last year.”

The Department of the Interior is now poised to issue new regulations for arctic drilling.

“This is not a place where you mess around,” says Marilyn Heiman, arctic program director for Pew Charitable Trusts, which made its own recommendations a few months ago. “This is probably the most challenging place on the planet to drill for oil.”

Heiman would like to see a set of standards in place to regulate any company that wants to operate in the Arctic.

“Most of the regs that Interior uses to regulate are based on temperate water,” Heiman says. “During the Deepwater Horizon spill, when the waves got to six feet, they stopped cleaning up oil. When it was dark, they stopped cleaning up oil. Those are normal conditions in the Arctic!”

From the bow of this icebreaker, the Healy, conditions are extreme, even on a bright blue spring day. The Arctic Ocean is a flat plain of ice, ice so thick we have to back and ram every hundred feet to make headway. Building-sized slabs of ice fold and crash on both sides of the hull. The open black water behind us freezes in our wake.

The Healy is the Coast Guard’s only working icebreaker in the Arctic. The nearest base and major port are 1,000 miles away. That worries Rear Admiral Thomas Ostebo, the commander of the Coast Guard here. Vessel traffic, he says, is on the rise, and the U.S. has little control over much of it.

“As the North Slope of Alaska and the northwest portion of Alaska down to Nome, as that all opens up and becomes accessible, we just don’t know what we don’t know,” he says. “I do know wherever humans operate in the marine environment, sooner or later someone gets in trouble or there’s some form of a disaster.”

Despite the risk, and Shell’s seetbacks, Alaska’s former oil and gas division director, Ken Boyd, says the Arctic is in play.

“If you’re hunting elephants,” he says, “you have to go where the elephants are.”

In its conference call over third-quarter earnings, Shell broke its long silence over plans in the Arctic. CFO Simon Henry said the company will move forward on leases in the Chukchi Sea, which he described as a “multi-billion barrel opportunity.”

“Individually, it’s the largest single exploration prospect in the Shell group,” he said during the call.

The company has submitted a stripped-down exploration plan to Interior to keep its options open to drill next summer.

In Wainwright, news that Shell may be back next summer was met with skepticism. But village leaders are planning ahead for the day when offshore oil does begin to flow. This winter they’re holding hazardous materials training sessions and drafting response plans in the event of a major oil spill, out on the ice, at sea.